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If you are in the software industry, you may have heard of a “service level agreement” or “SLA,” but do you really understand what a “service level agreement” actually is or when you might need one?

A “service level agreement” or “SLA” is a technical agreement that defines that parties’ expectations of the level of service that will be provided in a particular service provider relationship and establishes how a customer will be compensated if the service at any given time does not meet the expectations as defined in the agreement. It is usually drafted as a schedule to another agreement such as a master service agreement (“MSA”), software services agreement (“SaaS agreement”) or hosting services agreement rather than standing alone as the sole agreement defining a relationship between two parties. As a tech transactions and software attorney, I would expect to see a service level agreement present in any agreement involving a software as a service (“SaaS”) or hosting relationship; however, a service level agreement could be appropriate in other tech-related service relationships as well, in which metrics or standards for the delivery of the service mattered to the customer and not just the accomplishment of a particular service milestone. For example, a “service level agreement” might be appropriate in a business relationship with a provider of IT services, in a back-up or disaster recovery relationship, or in a data service relationship–these are all scenarios where a customer might have expectations beyond merely whether a particular task was performed or not that one or both parties might want to address in a separate service level agreement.

If you are questioning why it is customary to have a “service level agreement” and not just rely on a standard warranty or material breach clause, consider this: if an interruption in service occurs with a particular relationship and then resumes for any reason, does either the consumer or the provider really want to treat that interruption as a material breach and terminate the relationship? In many cases, the answer is “no.” From the provider’s perspective, the interruption may very well have affected its entire customer base, so of course, the provider doesn’t want to go out of business over a single incident. At the same time, it is frequently not in the consumer’s best interest to treat an interruption as a material breach either. The consumer may believe the service provider is the best provider in its industry to deliver a particular service, either because of the pricepoint, the technology or service offered, or the reputation of the particular provider. Also, the cost in terms of time and resources of finding an alternative provider might be higher than the consumer is willing to take on at that time. There might be no other alternative to the particular provider, or the financial costs of changing providers could be too high. Obviously, there may be legal consequences as well in terms of the cost and expense of enforcing a warranty clause and terminating a contract for material breach that could easily dissuade a particular consumer against exercising such rights.

Thus, for all of these reasons, a “service level agreement” or “SLA” is frequently relied upon by knowledgeable service providers and customers to define the parties’ expectations about the delivery of a particular technical service and to provide an alternative mechanism for compensating service failures outside of the standard warranty/breach framework. Where no such agreement exists, the parties often have no real expectations defined for the service, which more often than not will eventually bring a premature end to the relationship.

What types of terms should you expect to find in a “service level agreement” or “SLA”? As with most technical agreements, it is my view that the terms in a particular service level agreement need to be tailored to the particular relationship between two parties and not just copied from a third party’s agreement, so no single set of terms will be appropriate in all cases. For example, if you are a SaaS company and you rely on a third party to host your software, then the service level agreement you adopt needs to contemplate the service level agreement terms of the third party hosting your software and not be written independently of the hosting relationship. If you are procuring another technical service, you should make sure that the service level agreement reflects the expectations of your business or your customer base. If you don’t have expectations for what you are buying, then you need to do your homework and talk to an attorney, competing service providers, other businesses, etc. to understand the problems you might run into with the particular service and understand what expectations are reasonable for the particular service being procured. The worst drafting mistake you can make in adopting a particular set of terms for a service level agreement is to simply use a third party’s terms rather than customize the terms to the particular relationship, since the third party’s terms will likely have no relevance to your relationship. Having said this, there are some terms that are commonly found in service level agreements. These include such concepts as as “service availability,” “exclusions,” “scheduled downtime,” “uptime,” “service level guarantee,” “service credit,” “business hours,” “priority response times,” and “service level reporting.”

The bottom line is that if you are on either side of a technical service relationship, it is important to consider whether a service level agreement might be advisable to define the parties’ expectations for the relationship beyond just whether or not a particular service is performed. There are no single set of terms that should be adopted in all scenarios, but you need to be knowledgeable enough about what you are buying or selling to develop clear expectations in advance of the commencement of the relationship. As a SaaS company, you are both a buyer and seller of services, and therefore it would be prudent to define expectations for the service not only with your customers but also with your service providers, so that you obtain the services required to meet your customer’s expectations as well.